The mass anti-globalisation protests which have paralysed gatherings of G7/G8
leaders have highlighted a serious unease with the operations of unfettered
markets. For many, the present arrangement leads to perpetuation of gross global
inequity, and rampant globalisation is seen as making things worse. Similar
sentiments underlie the protest against policies of the International Monetary
Fund and the World Bank. These are seen to be pushing what has come to be called
the “Washington Consensus” of policy prescriptions designed to institutionalise
unfettered markets across the developing world. Unregulated markets are now
seen as the primary mechanism generating inequity on a global scale.

At another level, the saga of Huntingdon Life Sciences (HLS) in the UK has
become a landmark issue. The company, a leading user of live animals for experiments,
fell foul of the Animal Rights lobby. Mounting a sustained campaign of mass
protests, this powerful lobby was able to cut off all sources of bank finance
to the company. HLS had to move its operational headquarters from the UK to
the USA and rely on funding from non-banking sources. This was a dramatic illustration
of banks bowing to pressure from the provider of their funds – the depositors.
Not long a go the Bank of Scotland was also forced to withdraw from a deal with
the US televangelist Pat Robertson because of the latter’s controversial
views. The embarrassing about turn was forced on the bank by its shareholders
and depositors.

In the UK unease is mounting about the Private Finance Initiatives (PFI) which
seem to have delivered a pitiful level of public service at enormous cost to
taxpayers. Again unfettered market principles are seen as not suitable for all
purposes.

These developments provide an illustration of a major shift in public perceptions
about how economies and businesses operate. At one level unregulated markets
are seen as perpetuating inequity. An urgent need is seen to challenge the prevailing
dogma about free markets and introduce regulatory regimes to safeguard the public
interest. On another front, the freedom of financial intermediaries to provide
funding for operations without taking into account the wishes of the providers
of the funds is being seriously questioned.

These developments provide an interesting parallel with the ideals of Islamic
economics and finance. The quest for equity and justice has been central to
the thinking of Muslim economists. Indeed, most protest movements in Muslim
societies have their anchor in the spirit of social equity and justice. At the
same time Muslims are deeply concerned about the ways of financing businesses
to ensure that ethical considerations are paramount.

In this spirit, Muslim economists have argued for tempering the market mechanism
with regulations designed to embody the public interest. According to them,
in designing all policy, the primary consideration should be justice and equity
rather than laissez faire market operations.

Muslim jurists have argued the case for limits on land ownership and strict
application of inheritance laws to avoid concentration of wealth. Some radical
Muslim jurists have also argued that land is a communal resource and ownership
is confined to period of active use rather than perpetual. Again, mineral and
other natural resources are regarded as communal property.

In Muslim societies, the injunction of Zakat provides a vital mechanism for
addressing social welfare issues. All Muslims are required to give away at least
two and a half percent of their income to the poor and the needy as Zakat. As
the principle is well established in Muslim societies, Muslim economists have
argued for its institutionalisation with even higher levels of giving. A social
welfare state is thus not alien to Muslim thinking at all.

As for national borrowing, Muslims are expected to have risk-sharing contracts
rather than fixed rate loans. Translated into practice this would imply that
lenders to Muslim countries would need to be convinced of the viability of the
projects financed as their return would depend on the success of these ventures.
This would have a mitigating effect on spurious debt build ups and repayment
crisis as has become common.

Thus in theory Muslim societies should have a much more equitable ethos than
they do at present. This discrepancy is there for a variety of reasons, but
developments in banking and finance show that a slow evolution reflecting this
basic ethos is taking place.

In the area of banking and finance, Muslims share common concerns, about the
use of funds by financial intermediaries, with the growing body of ethical investors.

The best way to appreciate this is to look at the growth of Ethical funds and
investments. Basically, these try to incorporate the desire of the providers
of the funds to have a say in the use of their monies. Thus, some funds do not
invest in companies which deal in tobacco, alcohol, or military hardware. Others,
only invest in corporations which incorporate environmental sustainability criteria
in their operations.

This is in sharp contrast to the traditional banking model whereby the providers
of funds were expected to limit their concerns to the security of their investment
rather than the use of the funds. It was little wonder that ethical investment
notions were met with cynicism and ridicule when they were mooted in the early
seventies. However, they did reflect a public desire and slowly but surely the
movement has grown.

Islamic finance has a similar rationale. Indeed in some respects it goes further,
being concerned not just with what kind of activities are being financed but
also with the way in which they are funded. Thus Muslims are encouraged to invest
in “permissible” (Halal) activities, via “permissible”
means.

That means that while Islamic financial institutions will not invest in corporations
dealing with forbidden items like alcohol and gambling, neither will they deal
with organisations involved in riba, or usury, transactions. Indeed, the lending
of money for a predetermined return (riba) is expressly prohibited in the Qur’an.
Many Muslim jurists consider any form of interest as riba (usury) and thus do
not allow dealing with or investing in banks per se.

In practice this is less dramatic than it sounds. Muslims still make everyday
transactions like investing their surplus funds, house-buying, and taking out
loans and working capital for their businesses etc. For investment purposes
Islamic financial institutions employ criteria similar to those used by the
ethical investment funds. The big difference comes in the way they structure
lending transactions, both for personal finance and business purposes. In simple
terms, lenders enter into risk-sharing contracts with borrowers; return is based
on the outcome of the venture or investment, rather than a predetermined rate.

The principle of risk-sharing can have far reaching implications. For risks
to be shared, borrowers have to be willing to provide much more information
about their situation than normal banks would seek for lending against collateral
or guarantees. It will include confirmation that the funds are to be deployed
in permissible activities, as well as transparency in reporting financial information
about the progress of the business or project for which the money has been borrowed.

Several modes of financing have been developed. The primary tenet of Islamic
financial intermediation is that there should be a sharing of risk between the
lender and the borrower. Thus the two prominent instruments are Mudharaba and
Musharaka. The Musharaka is very similar to a partnership sharing profits and
losses. Under a Mudharaba, however, the provider of capital and labour share
the rewards, but losses are borne by the provider of capital only as the provider
of labour is already deemed to have contributed his share. There are also two
additional instruments utilised by Islamic bankers. These are Murabaha and Ijara.
The Murabaha is a simple cost plus transaction and is not accepted as a genuine
Islamic banking instrument by many Muslim jurists. Ijara transactions work in
a similar way to leasing.

Present day Islamic financial institutions also invariably have a Shari’a
(Islamic Law) Supervisory Board of Advisors. This is usually a body of qualified
Muslim jurists well versed in commercial transactions. All new transactions
and structuring of deals are vetted by these Boards for compliance with Islamic
Law.

Over the last three decades Islamic banking and finance has grown manifold
in Muslim communities and countries. In Malaysia, about five percent of all
banking transactions are conducted by Islamic Financial Institutions. This is
set to rise to ten percent by 2005. Pakistan’s Finance Minister has also
announced plans for a similar phasing in of Islamic financial intermediation.
Similar moves are afoot in most Muslim countries. Malaysian and Middle Eastern
corporations have also begun to raise long and medium term finance by issuing
Shari’a compliant bonds. There are plans for launching of primary and
secondary debt and equity markets in Shar’ia compliant financial instruments.

In other parts of the Muslim world Islamic equity investment funds have also
mushroomed. Very much like ethical funds, these restrict their portfolios to
approved corporations, based on criteria devised by their Shar’ia Supervisory
Boards. An increasing number of Muslim investors are channelling their savings
through these funds. There is also a Dow Jones Islamic Index which acts as a
benchmark for the performance of some of these funds.

In the UK and USA Muslim communities have started to experiment with saving
and housing finance products which meet the stipulations of the Shari’a
(Islamic Law). In the USA, the Islamic housing finance company Lariba, has had
its funding augmented by Freddy Mac, the leading mainstream provider of housing
funds. In the UK I-Hilal and Parsoli have started to market Shari’a compliant
ISA (Individual Savings Account) products. Indeed, a recent survey by business
information company, Datamonitor, concludes “the market for Islamic (Shari’a-compliant)
finance in the UK is set to grow hugely. A huge gap exists for Shari’a
compliant equity and mortgage products. Muslims have historically been underserved
by UK financial institutions, but this is set to change.”

The closest situation to a possible scenario in the UK is the Malaysian example.
There, a full range of banking products are available to customers from Bank
Islam Malaysia Bhd or the “Islamic Banking” counters of all the
major banks. The set up is fully regulated by the Central Bank of Malaysia and
Islamic finance instruments seem to co-exist with traditional banking products
without any problems. If such products are launched in the UK, then the Malaysian
model would be ideal as it provides a precedent for a small Islamic banking
sector harmoniously co-existing with a much larger traditional banking sector.
In fact, two years ago, in a seminar hosted by the Islamic Foundation in Leicester,
Eddy Gorge the Governor of the Bank of England and Ahmed Mohammed Don the former
Governor of the Bank Negara Malaysia (Central Bank of Malaysia) had and exchange
of views on this very subject.

The growth and public appreciation of Islamic financial institutions, just
as with the ethical investment movement in developed economies, will in time
help ‘persuade’ the big financial players to pay far more heed to
their customers’ views in deciding where and how they invest their depositors’
money. In the process it will become easier for social and ethical criteria,
like equity considerations, to be incorporated into financial intermediation.

The incremental growth of Islamic financial institutions also shows how Muslim
societies will begin to incorporate the spirit justice and equity. Emerging
from the colonial interlude, Muslim societies have begun to reflect on the basic
precepts of their economic organisation. Understandably, there are a host of
external and internal realities which impinge upon the way these societies are
organised. However, as the move towards more representative societies gathers
pace, the underlying thrust of the Islamic quest for equity and justice is likely
to manifest itself in developments in Muslim societies over time.

In these endeavours Muslims will be in good company. Together with the growing
protest against the growth of global inequity, the quest for ethical financial
intermediation, will provide platforms for like minded players from across faith
and ideological boundaries to come together.